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Author: Aloke Ghosh Publisher: ISBN: Category : Languages : en Pages : 32
Book Description
Although auditor litigation risk is considered as a leading explanation for auditor resignations, audit risk, and business risk might also trigger resignations. Auditor litigation risk is defined as the risk of the auditor being involved in a lawsuit, audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated, and, finally, business risk is defined as the risk associated with the client's survival and profitability. Because the three risk factors are not mutually exclusive, we examine their relevance and incremental importance using measures from the pre- and post-resignation periods. Using summary indices from the pre-resignation period, we find that all the three ex-ante risk indices are incrementally important for resignations, especially when the predecessor auditor is a Big 4 firm. Because the ex-ante risk factors are prone to measurement errors and are less likely to capture auditor's proprietary information about the client, we analyze data from the post-resignation period when the auditor's proprietary information is likely to become publicly known. We find that within a three-year period following an auditor's resignation, clients are more likely to: (1) be involved in class-action lawsuits (ex-post litigation risk), (2) have internal control problems (ex-post audit risk), and (3) to be delisted from a national stock exchange (ex-post business risk). Our research demonstrates that auditors consider all three risk factors, and not just litigation risk, in resignation decisions.
Author: Aloke Ghosh Publisher: ISBN: Category : Languages : en Pages : 32
Book Description
Although auditor litigation risk is considered as a leading explanation for auditor resignations, audit risk, and business risk might also trigger resignations. Auditor litigation risk is defined as the risk of the auditor being involved in a lawsuit, audit risk is defined as the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated, and, finally, business risk is defined as the risk associated with the client's survival and profitability. Because the three risk factors are not mutually exclusive, we examine their relevance and incremental importance using measures from the pre- and post-resignation periods. Using summary indices from the pre-resignation period, we find that all the three ex-ante risk indices are incrementally important for resignations, especially when the predecessor auditor is a Big 4 firm. Because the ex-ante risk factors are prone to measurement errors and are less likely to capture auditor's proprietary information about the client, we analyze data from the post-resignation period when the auditor's proprietary information is likely to become publicly known. We find that within a three-year period following an auditor's resignation, clients are more likely to: (1) be involved in class-action lawsuits (ex-post litigation risk), (2) have internal control problems (ex-post audit risk), and (3) to be delisted from a national stock exchange (ex-post business risk). Our research demonstrates that auditors consider all three risk factors, and not just litigation risk, in resignation decisions.
Author: Jessica Camil Gabriel Publisher: ISBN: Category : Languages : en Pages : 70
Book Description
The purpose of this paper is to investigate the factors associated with the audi tor search period i.e. the number of days needed to appoint an auditor following incumbent auditor resignation or dismissal. Relying on prior research investiga ting the factors associated with auditor changes in general and client acceptanc e and client discontinuance in particular, we examine whether litigation risk is a primary determinant of the auditor search period. Our sample consists of more than 2700 auditor change cases that have occurred be tween 2000 and 2007 and we conclude that litigation risk is a major determinant of the auditor search period. The importance of litigation risk is evidenced by the significance of audit risk and financial risk factors found by the study as well as the significance of auditor resignations.
Author: Jiahui Liang Publisher: ISBN: Category : Languages : en Pages : 29
Book Description
This paper studies the influence of conditional conservatism on the auditor resignations, and more importantly, the impact of corporate governance on this relationship. The existing literature has provided evidence on the existence and pervasiveness of accounting conservatism, such as compensation and debt contracts, shareholder litigation, taxation and accounting supervision. However, there is very limited evidence and discussion on the potential impact of accounting conservatism on audit risk and auditor resignation. Furthermore, research on how effective corporate governance affects the relationship is rarely covered.We select the firm-year observations from 2005 to 2015. We find that the conditional conservatism reduces the auditor resignations by reducing the expected audit risk. However, further empirical results show that this reduction in auditor resignations is attenuated by higher corporate governance quality. That is, effective corporate governance will moderate the negative correlation between conservatism and auditor resignations. The empirical results of this paper are of value to firms, auditors, regulators, standard-setters and corporate managers. In addition, this paper expands the literature on the influencing factors of auditor resignations.
Author: Jayanthi Krishnan Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
Litigation against auditors has increased dramatically in recent years. Auditors can offset litigation risk in a number of ways, including improved audit quality and planning, increases in audit fees and increases in the issuance of modified opinions. Auditors can also adjust their client portfolios by becoming more selective in their choice of new clients and by withdrawing from high-risk engagements. We test the hypothesis that litigation risk motivates auditor resignations by comparing resignation companies with two groups of client companies that dismissed their auditors: one matched with the resignation companies on industry and year, and the other matched on year alone. We find resignation companies differ from dismissal companies along dimensions that capture the probability of litigation: financial distress, variance of abnormal returns, auditor independence, tenure and a modified (particularly going-concern) opinion. We also construct a litigation proxy based on a prior litigation-prediction model and find that the proxy is positively associated with the probability that the auditor will resign rather than be dismissed from the engagement. Our analysis is consistent with concerns expressed by the accounting profession that litigation pressures lead to the withdrawal of audit services for a segment of the market.
Author: Kannan Raghunandan Publisher: ISBN: Category : Languages : en Pages :
Book Description
This paper examines the market for audit services when the incumbent auditor of an SEC registrant has resigned from the engagement. While many previous studies of auditor changes have examined auditor dismissals by the client, only a few studies have specifically focused on auditor resignations. Auditor resignations constitute a unique setting because they may indicate increased likelihood of possible future losses to the new auditor, and provide an opportunity to test the demand-and-supply side incentives in the market for audit services.Results from analyses of 156 auditor resignations and a control sample of 375 auditor dismissals indicate that Big 6 firms were less likely to serve as the successor auditor when the predecessor has resigned, after controlling for three other factors identified as proxies for litigation risk to the auditor (client?s financial stress, industry membership and proportion of total assets in receivables and inventory). The effects were especially pronounced for the subset of resignees in financial stress. These results support suggestions that the implications of auditor resignations are different from auditor dismissals, and provide supporting evidence for the suggestions that supply-side incentives should be considered in examining the market for audit services.
Author: Beng Wee Goh Publisher: ISBN: Category : Languages : en Pages : 65
Book Description
We examine the relation between client tax aggressiveness and auditor's resignation decision. Consistent with the agency view of tax avoidance which suggests that client tax aggressiveness can increase litigation and reputational risk to auditors and increase the potential conflict with managers, we find a positive association between our proxies for tax aggressiveness and the likelihood that an auditor resigns from an audit engagement. Further, this association is stronger when external monitoring of the client firm is less effective, when there is greater potential for agency problems in the client firm, and when the economic importance of the fees received from the client firm is lower. Overall, our study identifies client tax risk as an important determinant of auditors' resignation. This result should be of interest to auditors who actively manage client audit risks and to tax authorities who have incentives to identify firms with abusive tax reporting behavior.
Author: Ashraf Elsayed Publisher: ISBN: Category : Languages : en Pages : 9
Book Description
The Audit Risk Model. The Statement of Auditing Standard (SAS) 99, 107, and International Standards on Auditing (ISA) 240, 315, and 330 require auditors to assess fraud risk factors and materiality level (risk of material misstatement) in a client's financial statements (Bhattacharjee, Maletta, & Moreno, 2016). It further requires auditors to gather sufficient appropriate audit evidences in order to provide reasonable assurance whether the client's financial statements are free of material misstatements (Bhattacharjee, Maletta, & Moreno, 2016). The auditors have to assess the effectiveness of a client's internal control over the financial reporting, thereby plan the nature, timing, and the extent of their audit procedures to assess the fraud risk in a client's financial statements (Burton, Wilks, & Zimbelman, 2013). The SAS 107 provides a model for audit risk, in which, audit risk (AR) = inherent risk (IR) X control risk (CR) X detection risk (DR). The inherent risk is the susceptibility for an account or assertion to be materially misstated, whereas the control risk is the risk that an entity's internal controls fail to detect financial reporting misstatement. The detection risk is the risk that substantive and analytical audit procedures fail to detect misstatements in the financial reporting. However, this model does not address the influence of sociological, organizational, and ethical factors on the management fraud and does not account for type I and type II audit errors risk, which is the risk to reject fairly presented financial reporting (false negative), and the risk to accept fraudulent audit report (false positive) respectively.
Author: Tom Adams Publisher: ISBN: Category : Languages : en Pages : 48
Book Description
Financial scandals such as those surrounding the Enron-Andersen debacle provoke concerns that auditors lack independence when faced with influential clients, and are unwilling to respond to client risks by resigning. Unlike previous studies that examine whether client influence affects audit quality on ongoing engagements (and provide mixed results), we investigate whether office-level client influence affects auditor resignations from risky clients for whom the resignation decision is most salient. Using a sample of risky clients, we find that (1) auditors are more likely on average to resign from influential clients, and (2) this positive association holds for non-Big N auditors, auditors in smaller offices, and non-specialist auditors. We speculate that audit firms or audit offices that have inadequate mechanisms to mitigate independence risk use resignation as a tool to counter such risk. This is consistent with the suggestions offered in professional guidance. Also, importantly, the effect of client influence is distinct from that of client size. Influential clients are prevalent across the spectrum of absolute client size, and the positive association between client influence and auditor resignations occurs for both large and small clients.
Author: Aloke Ghosh
Author: Aloke Ghosh
Author: Jessica Camil Gabriel
Author: Jiahui Liang
Author: Jayanthi Krishnan
Author: Sue Woolley Scholz
Author: Kannan Raghunandan
Author: American Institute of Certified Public Accountants. Auditing Standards Division
Author: Beng Wee Goh
Author: Ashraf Elsayed
Author: Tom Adams